In recent years, “unlimited” vacation policies have gained traction in California, becoming increasingly popular for providing employees with limitless paid vacation or paid time off (PTO). A recent California Court of Appeal decision gives employers some guidance on these policies — it held that an employer’s supposed “unlimited” vacation policy wasn’t unlimited; it actually had an implied cap, and the employer violated the Labor Code when it failed to pay out the unused vacation. But it also went out of its way to say there might be some circumstances under which unlimited policies are valid and provided some principles employers can apply to their policies (McPherson v. EF Intercultural Foundation, Inc., 47 Cal.App.5th 243 (2020)).
Unlimited vacation policies place no maximum limit or cap on vacation time, and employees can take time off whenever they like provided they still successfully complete all of their tasks — but employees also don’t accrue vacation time, meaning that theoretically, there’s no “vesting” or pay out of unused time when the employment relationship ends as is required by Labor Code section 227.3 under normal accrual vacation policies.
In this case, the company had a vacation policy for employees, but the policy didn’t apply to area managers, who could take time off with pay but didn’t accrue vacation hours. The managers didn’t have to use the time off request system like other employees, nor did they keep track of the days used; they were simply required to notify their supervisors before taking time off. The plaintiffs, all area managers, argued that EF’s unwritten “unlimited” paid vacation policy that applied to them was actually an unlawful “use it or lose it” policy.
In the decision, the Court of Appeal agreed that based on the particular facts of this case, EF’s policy was not unlimited and Labor Code section 227.3 applied. EF’s policy was not in writing and EF never told plaintiffs that the policy was “unlimited.” The court determined that it was EF’s policy and practice to give plaintiffs some fixed amount of vacation time consistent with a traditional accrued policy. The evidence showed that the plaintiffs took about two weeks of vacation each year. They never sought or received more than four weeks (20 days) as their schedules and job duties would not permit more time off. Thus, the court concluded that EF’s policy had an implied limit or cap and held that the employees were due unpaid vacation wages.
Because EF’s policy was not unlimited, the court didn’t decide the broader question of whether vacation time vests under a truly unlimited no-accrual vacation policy. However, the court suggested that such policies may be valid under certain circumstances. In a short section of its opinion, the court clarified that it is not holding that section 227.3 necessarily applies to all unlimited paid time off policies, and it provided some criteria under which an unlimited policy may be valid.
In the court’s view, an unlimited policy may not trigger section 227.3 when the policy is in writing and does the following:
- Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule — including employees’ ability to decide when and how much time to take off;
- Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
- Allows sufficient opportunity for employees to actually take time off or work fewer hours in lieu of taking time off; and
- Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours and takes minimal time off while another works fewer hours and takes more time off.
Although the court’s opinion doesn’t provide a bright line rule for establishing valid unlimited vacation policies, the criteria above do provide some guidance for employers on what may constitute a valid policy, depending on the facts of the case, so employers considering implementing an unlimited vacation policy should use these factors when crafting and implementing the policy.
Employers also should note that the factors focus not only on what the policy says, but also how the policy is applied in practice — so simply drafting a good written policy isn’t enough. As in this case, courts will look at how the policy was carried out and use principles of equity and fairness in resolving any vacation pay disputes.
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